A report by the consulting firm Rothstein Kass found about half of the 400 hedge fund managers who responded believed that 2012 would be a “a difficult or somewhat difficult” year for the industry. Almost 40 percent expressed concerns that the United States would enter a double-dip recession. Only about 32 percent of those who responded in 2011 thought it would be a rough year for hedge funds.
Political and economic uncertainty, tougher requirements by the Securities and Exchange Commission and brutal competition for investment dollars are among the challenges facing the industry in 2012, said Howard Altman, co-chief executive of the Financial Services Group at Rothstein Kass. “Less people are optimistic; they’re thinking about the economy, the way the markets have behaved post-crisis, and the regulatory environment that’s facing them,” he said.
E-mails were sent to hedge fund managers identified through industry databases to participate in the study. The 400 managers who responded represent 771 hedge fund vehicles, Rothstein Kass said.
“A lot of larger funds will fail to meet the performance expectation of their investors, which may dampen overall investor interest in hedge funds,” predicted one respondent in the 20-page report. “Many funds had negative returns in 2011 despite a flat stock market – the pressure is really on in 2012!”
About one third of those who replied indicated that they did not plan to use leverage when making investments in 2012 while about 52 percent planned to use less than 2-to-1 leverage this year. Mr. Altman said that trend was surprising.
“This business has always had higher leverage in its moniker,” he said. The decrease in leverage likely reflects demands made by investment banks and other lenders in this economic environment and tougher regulatory requirements.
Still, 66 percent plan to raise assets by at least 25 percent in 2012.
Raising capital in this cutthroat era is among the toughest challenges facing the sector this year: The study found 79 percent believe seeding was critical to a successful fund start, and almost 43 percent indicated they would be willing to lower fees in exchange for early-stage or seed capital.
“Capital has been going to the very large funds,” which makes it tougher for funds with less than $1 billion under management, Mr. Altman said. “Capital raising is a very large challenge.” He expects industry consolidation will play a role in the industry.
Meeting new S.E.C. requirements is also a major concern for hedge funds. About 52 percent expressed concerns about the scope and frequency of reporting requirements under new regulatory rules, and about 43 percent worried about having the staff and resources needed to comply with the new reporting requirements.
The report also found that women- and minority-owned companies were still a small segment of the industry. About 6 percent of the respondents said that their firms were owned or managed predominantly by women, while 10 percent reported that they were predominantly owned or managed by minorities.
